That has led to a new kind of gold rush: debt buying. In the past, when a company was owed money by a customer, it would hire a collection agency to get the money back, paying the agency a percentage. But today, the vast majority of collection agencies in debt courts have purchased those debts as a business plan.

Called "third-party debt buyers," companies like Palisades Collections buy consumer debts from major companies—Chase, Citibank, Fingerhut, Sears—long after those companies have given up trying to get their money back. Buying the debts in multi-billion-dollar bundles for pennies on the dollar, debt buyers are then free to go after the creditors for the full amounts, and, with fees and service charges tacked on, they can collect about twice what the customer originally owed.

Debts can be purchased and repurchased—sometimes, it's even difficult for the attorneys to say how the debts were originally created.

Tried and true: From the bench, Noach Dear makes an unlikely comeback.
Jared Gruenwald
Tried and true: From the bench, Noach Dear makes an unlikely comeback.
Beverly Smith, one of many saddled with a debt she doesn’t owe
Jared Gruenwald
Beverly Smith, one of many saddled with a debt she doesn’t owe

There's plenty of evidence that these debt buyers are using the courts to go after people who don't actually owe the money they're being sued for. In a sample study of 600 cases that the Urban Justice Center conducted for cases brought in 2006, 99 percent didn't hold up to basic legal standards of evidence. Debt collectors frequently neglect to do the simple legwork it would take to verify a person's Social Security number, address, or bank account. Last month, Attorney General Andrew Cuomo sued a debt buyer named Lamont Cooper and shut down two of Cooper's companies. Cuomo alleged that Cooper's firms had routinely failed to serve people court papers where they actually lived and wasn't properly verifying the identities of the people they sued. Last week, Cuomo announced that he was fining three additional collection agencies on similar charges, and was pursuing a dozen more.

Many of the people who come to Dear's courtroom say they never received a summons. They make their way to court on their own after they go to an ATM machine and find that their bank accounts have been frozen, or when they receive a notice that their credit has been ruined. For many, it's the first time they've heard anything about a debt at all.

The Urban Justice Center's 2006 study found that 40 percent of the 600 lawsuits examined were filed by one company, Palisades Collections, and its law firm, Pressler and Pressler—a ratio that suggests Palisades is filing about 125,000 lawsuits each year. In 2004, the city found that two-thirds of defaulted credit card debts had been purchased by only 10 companies.

Palisades has no website of its own. But do a search on its name, and you'll find page after page of horror stories by people claiming they were wrongly sued for debt. (Multiple attempts to speak with someone at Palisades resulted in a manager answering that the volume of calls they receive prevented anyone there from answering questions.)

When Palisades purchases debts, it usually gets little more than a spreadsheet with names, account numbers, and debt amounts. Sometimes, there are addresses and Social Security numbers; sometimes, there aren't. The information is often years old by the time the company gets it.

Yet instead of spending the resources to track down and confirm that information, collection agencies seem to have adopted a different strategy: sue. Assume the defendants won't show up. Then, go after bank assets.

The debt buying industry "is crying out for regulation," says the city's commissioner of consumer affairs, Jonathan Mintz. He describes debt collection agencies as bottom-feeders, an industry that is "far down the food chain."

Recently, there have been some signs that things are shifting. On the national level, President Obama has called for sweeping changes: He recently called credit card executives to Washington and denounced the billing practices that have led Americans ever deeper into debt. (Dear's reaction: "I would say to the President, 'If you want to know how to resolve this issue, come down to 141 Livingston Street.' ")

Besides Cuomo's settlement, Dan Garodnick, the City Councilman who represents Stuyvesant Town, recently pushed through a bill that closed a loophole that allowed third-party agencies to purchase debts without a license. (They do have to be licensed to bring a lawsuit, but the collection agencies were able to exploit a loophole in the law and get around that, says Harvey Epstein of the Urban Justice Center.) The City Council and the city's Consumer Affairs Department have each held hearings about cleaning up the industry. Judge Fern Fisher—whom Dear considers a mentor—created the Thursday-afternoon clinic at the courthouse, one of the first of its kind in the nation. She has commissioned research into why people don't show up to court. As of April 2008, she has been making debt collection agencies send summonses through the court—if the notices comes back "return to sender," the collection agencies are no longer able to bring the suit. Fisher says that that measure alone has eliminated about 10,000 mistaken lawsuits and has brought more people into court.

"I do not believe it's because people are callous and irresponsible," Fisher says, speaking of the many New Yorkers who don't show up. "Some people are afraid. Some people just don't understand the significance. Some people are hopeless."

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